The financial realm consists of two types of markets: developed markets and emerging markets. Developed markets are those that met the criteria to be a considered developed. Some criteria that consider a country/market to be developed are: income per capita, high gross domestic product (GDP), level of industrialization, and Human Development Index. Economic criteria are significant in determining whether or not a country has a developed market, but it is not the only criteria. Institutions such as EAFE (Morgan Stanley Capital International Europe, Australia, Far East); Morgan Stanley Capital International World Index; International Monetary Fund (IMF); and Financial Times and Stock Exchange (FTSE), are those that rank and consider what countries they considered developed. Because numerous institutions exist with different criteria determining a country as developed or emerging, there is no set list of countries that are considered one or the other. But there are well-known countries that are considered developed by all institutions and indexes such as United States, Japan, Germany, and United Kingdom. More relevant to the scope of this discussion, emerging markets are those markets considered to have high risks, as well as high returns. These markets are in the process of rapid growth and industrialization. Whether it is political reasons and/or economic stability, there is a reason that emerging countries have not met the criteria to be considered developed. Some examples of emerging countries are as follows: Korea, Chile, Thailand, Venezuela, Russia, Argentina, Indonesia, Turkey, and Taiwan. Emerging markets includes all of South and Central America; all of the Far East (with the exception of Japan, Hong Kong, Singapore, Australia, and New Zealand); all of Africa; and parts of Southern and Eastern Europe; and countries of the Soviet Union. Although there is high risk within emerging markets, many are realizing how they can gain higher returns and hedge risk by participating in emerging markets. It seems ironic that investors can hedge risk and expect high returns with markets that are known to be volatile and risky, but the fact is that emerging markets gives investors and firms the ability to diversify their portfolio (in this context, a portfolio is a collection of investments worldwide held by investors). One asks, how can you diversify and hedge risk by getting involved in emerging markets? The answer lies within the concept that emerging markets are lowly correlated with other returns and markets, such as developed markets. This is somewhat similar to the standard hedging method of exposure netting, which involves offsetting exposures in one currency with exposures in the same or another currency. The exchange rates are expected to move in a way that losses in the first exposure will be offset by the gains on the second exposure. This is the idea behind involving oneself in risky markets to hedge risk. A firm that participates in a developed market should also invest in an emerging market because developing markets tend to fluctuate simultaneously. If the firm incurs a loss, it could have possibly offset that loss by a gain in the emerging market, which is lowly correlated with developing markets. One old dogma in finance is that with greater risks, come greater expected returns. This proves to be true in regards to emerging markets. Those firms and individuals that invested in emerging countries saw gains that were as high as 30% - 40%. But on the other side of the spectrum, there were losses that were tremendous. It is clear that the possible high returns in emerging markets are related to incredible risks. References Investopedia. (2009, February 11). Portfolio. Retrieved May 9, 2003, from http://www.investopedia.com/articles/basics/03/080103.asp Shapiro,A. & Sarin, A. V.(2009). [Review of the book Foundations of Multinational Financial Management]. International Portfolio Investment. 386– 396.